Chart of the Week - CDNX/Gold ratio

The corpse of the TSX Venture Exchange (CDNX) is twitching. However, there is a long ways to go before it gets back to the levels seen in Q1 2007 just below 3,400. Indeed the CDNX is nowhere near the highs of February 2011 when it reached 2,465. At current levels, the CDNX is back where it was in late 2003. It has been a very frustrating time for participants in the junior markets.

2003 was the start of an excellent move for the junior CDNX market. The boom lasted for 4 years before topping out in 2007. It was a good time to be in the junior exploration sector as gold/silver, metals, rare earth and oil and gas stocks enjoyed a steady run. Then came the sub-prime meltdown and by late 2008 the CDNX had fallen a disastrous 80% as investor’s fled the high risk stocks. Hedge funds were major participants in the CDNX and they were faced with redemptions. As a result they had to raise cash by any means possible and often that meant cashing out at levels sharply lower.

The recovery from the lows of 2008/2009 was impressive as the market came close to quadrupling. Then came the Eurozone collapse and once again, the CDNX crashed and burned. It was not as bad this time but the market still fell over 50%. That’s the CDNX – boom or bust and rarely anything in between.

The chart above is not the CDNX. It is the CDNX/Gold ratio. The CDNX is heavy on mining stocks and in particular gold/silver exploration plays. There is no sub-index for gold/silver stocks so one has to compare the entire CDNX to gold. Since the top in the CDNX in 2007 the market has favoured holding gold over the stocks. Since the crash of 2008 the CDNX/Gold ratio has traded between 0.7 to 1.75. Currently the ratio is at .76 just above the lows seen only 3 weeks ago.

But from 2000-2008 the CDNX/Gold ratio averaged a lofty 3.875. If the CDNX/Gold ratio was at that level today the CDNX would be north of 6,000.

Mike Ballanger doesn’t mince any words when he talks about the devastation of the junior gold/silver miners over the past few years. Mike, currently with Union Securities, has been an active participant in the junior markets for over 30 years. In his September “Junior Mining Update” Ballanger notes that he has never seen the juniors so “unloved”. He says he has spent hours trying to figure out why the juniors have effectively been “thrown under the bus” over the past few years.

However, he also concludes one only has to look at the poor performance of the senior gold miners during the same period. He noted that if the seniors “can’t get out of their own way”…. “how on earth would one expect to have even the slightest chance of making money in the juniors?” Mike goes on to note that hundreds of millions has been raised since 2001 yet there has been very few discoveries and M&A activity has been sparse.

Mike and I have rarely followed each other in writing about the CDNX as Mike writes almost exclusively about the junior market whereas I write about many different aspects about the markets. But Mike had many interesting points in his most recent writing that bared repeating.

Technically the CDNX/gold ratio is showing some interesting divergences. The weekly chart above shows numerous positive divergences. The MACD, RSI and CCI were all diverging positively at the recent lows. The past three weeks has seen the ratio move up from that low of 0.7 to today’s 0.76. The gain seems small but the CDNX itself is up 5 of the past 6 weeks. While the index is only up 16% (gold is up roughly 14% in the same period) I have seen a few individual stocks that I follow move quietly up 50%. The MACD and RSI indicators have both given buy signals and the CCI is close to giving a confirmation buy signal.

Of course the seniors have also snapped back to life. In some respects they have been leading the price of gold which is what one wants to see in an emerging bull market. In our weekly technical commentary the forecast for gold has been for a rise to at least $2,100 in 2012. If gold reaches those levels the CDNX would reach 1,596 assuming the CDNX/gold ratio remains at 0.76. This would still leave the CDNX well below the highs of 2011. But if the CDNX/gold ratio were to as a minimum reach the highs seen in the past few years of 1.75 the index would reach 3,675 which is the levels seen back in 2007. Now that would be a nice thought and put a smile on Mike’s face.

Now that note of caution. October is coming and the markets can sometimes be volatile. The good news is that Bernanke has blessed the markets with QE3 (and the ECB and the BOJ are also doing their own version of QE). So unless a serious shooting war starts in the Mid-East the markets won’t go straight up but the run that is currently underway could last longer and go higher than most people expect.